By Leika Kihara

TOKYO (Reuters) -Japan’s central bank should be cautious about deepening negative interest rates as such a move could have a “very big” impact on lenders’ earnings, the head of a lobby of regional banks said.

Japanese commercial banks have been vocal opponents of the Bank of Japan’s negative rate policy, as years of ultra-low rates erode their profits and add to woes such as a dwindling population and intensifying competition.

Regional lobby chief Hisashi Shibata said the BOJ’s massive stimulus programme had supported the economy by keeping borrowing costs low for companies hit by the coronavirus pandemic.

“On the other hand, the BOJ’s policies have narrowed bank margins and their side-effects are materialising,” Shibata, who took over the rotating role of the bank lobby’s chief on Wednesday, told a news conference.

The central bank has created several schemes since last year to mitigate the pain inflicted on lenders by its negative rate policy and spur regional lenders to further revitalise their business.

These include a scheme for the BOJ to pay interest to lenders that tap it for funds to boost lending, a move the central bank said was aimed at convincing markets it would cut rates, if needed to support the economy.

“Even after the creation of this new scheme, I hope the BOJ takes a cautious stance about deepening negative rates,” Shibata, who is also president of regional lender Shizuoka Bank, told the conference.

The BOJ in March moved to make its stimulus programme sustainable enough to weather a prolonged battle to fire up inflation to a target of 2%.